Regional retailer Nakumatt and its competitor Tuskys could list on the Nairobi Securities Exchange (NSE) if their proposed merger is approved and they successfully execute their new business strategy for at least two years.

A joint media announcement this week said that Tuskys, Kenya's second largest retail chain, is coming to the rescue of Nakumatt, after the two family-owned retailers announced that they were exploring options for synergies, co-operation and business integration.

"Such an arrangement will include strengthening and streamlining management, acquisition of assets and eventual merger of the entities. These confidential discussions are continuing and although the engagement has been positive and good progress has been made, it is important we acknowledge that a formal agreement is yet to be reached and will be subject to notification and approval by regulators and lenders," the retailers said in a joint statement.

New structure

A source well versed with the proposed merger told The EastAfrican that the retailers could after the merger, list on the NSE, to inject more professionalism and transparency which will instil a strong governance structure in the new outfit.

"Should the merger go through, the new business model will be given two years to work before getting into the bourse.

As it is, there is potential for the new business model to attract major financing from investors who have been distancing themselves from the regional retail business due to the strong family influence and unclear corporate and financial structures.

"With this merger, there will now be a very good opportunity for them to enter the NSE with a fresh start for both retailers as partners in a private company that can very easily go public within the next five years," the source said.

It is expected that with the eventual listing, the rebranded retailer will be clearly structured, comply with the Capital Markets Authority governance structures, and will also attract additional capital injection from the bourse to address their business needs.

The listing is also expected to lift the tight family control, allowing investors to access it, an option that has been difficult before.

Despite declining to make the merger deal public, it is understood that Nakumatt will, in the interim, access supplies from Tuskys' supply chain, based on the goodwill the latter has with its suppliers, a redeemable move that is expected to see the Nakumatt stores flourish again.

"The other parties can only come in as debt investors after the merger. We are still working on the valuation of the two businesses and the merger process could take up to a year," Tuskys chief executive Dan Githua said.

Principal shareholding

Under the proposed merger, both Nakumatt and Tuskys families will retain principal shareholding.

"The two businesses will collapse into one. But before the eventual merger, there's going to be a process of dealing with the liabilities," Mr Githuia said, in reference to the money Nakumatt owes its employees, suppliers and lenders.

The EastAfrican understands that already a financial advisor has been brought on board to work on the deals of the merger, assess the financial positions of both outfits before a formal merger notification is done to the Competition Authority.

The merger move comes at a critical time in Nakumatt's survival plan, having been beleaguered by a $150 million debt, with some of its supplies already pushing for its winding up.

Nakumatt has also in the past two months been shutting down some branches in the region as it seeks to retain a tight financial control to stay afloat.

So far, it has shut down five branches in Uganda, two in Kenya and sent hundreds of employees at its Nairobi warehouse on forced break in May.

The impending rescue by Tuskys is coming seven months after Nakumatt failed to secure a $75 million financing deal quick enough to pay its suppliers.

If approved, the merger will create one of the largest supermarket chains in East Africa.

Regulatory hurdles

However, the plan faces regulatory hurdles given that the two businesses jointly control more than 50 per cent of the Kenyan and Ugandan retail markets, meaning that they have to satisfy requirements of regulatory agencies in both countries.

The agencies will determine the possible market dominance on consumers.

Kenya's Trade Principal Secretary Chris Kiptoo while welcoming the move, also cautioned that: "It is my expectation that they will submit their merger agreement to the Competition Authority and if it meets the regulatory compliance requirements, then it is okay. It is now upon the competition agency to determine what extent of dominance this proposed merger will have in the retail market. However, we do hope that this merger will ease off the pressure on Nakumatt," Dr. Kiptoo said.

Robert Juma, an analyst with Catalyst Capital said that the proposed merger will see the retailers enjoy massive benefits from economies of scale which would be a boost to the overall operational costs.

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